United States: CFPB Seeks Comment on Unused Gift Card Balances

CFPB Seeks Comments on its Draft Strategic Plan

The CFPB is taking comments on its draft strategic plan for
2013-18. The draft strategic plan is available at http://www.consumerfinance.gov/strategic-plan/
and the CFPB would like the public to email comments to StrategyPlanComments@cfpb.gov
by October 25, 2012. The strategic plan is a broad overview of the
CFPB's goals in the coming years and does not contain specific
regulations. Nevertheless, Waller encourages its financial
service clients to weigh in and comment on the plan.

The EFTA provides that, with limited exception, gift
certificates (excluding those issued only in paper form), store
gift cards, and general-use prepaid cards—all generally
referred to herein as "gift cards"—issued by
vendors to their consumers must not expire for a minimum of five
years. However, many states have enacted unclaimed property
statutes providing that gift card balances not utilized for a
prescribed period of inactivity—typically between two to five
years—are deemed abandoned and must be transferred to the
state for safekeeping on behalf of the consumer to whom it belongs.
Such statutes have been adopted in Tennessee and Maine, both of
which deem gift card balances abandoned after a two-year period of
inactivity.1 After transferring unused gift card
balances to Tennessee or Maine, vendors are relieved from the
obligation to honor the cards and, in such instances, gift card
holders must file claims with the state holding the funds in order
to receive the remaining gift card balance. Until the
submission of a claim, however, states utilize unclaimed property
as part of the state operating budgets.

Because unclaimed property statutes in Maine and Tennessee
provide for the "presumed abandonment" of unused gift
card balances and further relieve gift card issuers from having to
honor such gift cards prior to the expiration of the five-year
minimum period of time set forth by the EFTA, the CFPB must
determine whether the state statutes at issue permissibly provide
greater consumer protections than those afforded under the EFTA or
instead run afoul of EFTA mandates.

Factors Supporting Claim that State Laws are Inconsistent with
the EFTA

In its request for comments, the CFPB acknowledges difficulties
that gift card holders might face in obtaining unclaimed property
from states. While states generally maintain online databases where
property owners can locate assets or funds held by a state as
abandoned or unclaimed property, states have historically received
low percentages of claims. This likely results in part from
priority rules affirmed by the United States Supreme Court which
provide (1) that abandoned property transfers first to the state of
the owner's last known address, and (2) if the gift card
holder's address is unknown, then abandoned property transfers
to the gift card issuer's state of formation. Since it is not
unusual for gift card holders to reside in states other than those
where a gift card was purchased, and such parties likely have
limited, if any, knowledge regarding the state of incorporation of
a gift card issuer, these priority rules most certainly create
confusion among gift card holders in trying to locate and pursue an
abandoned property claim.

The CFPB further recognizes that the unclaimed property laws at
issue impose an additional burden upon gift card holders by
requiring them to file claims with states in order to obtain
outstanding gift card balances and that in many instances such
attempts might be exacerbated as a result of gift card issuers'
inability, due to lack of records, to report gift card holder names
to states collecting abandoned balances, thus making it difficult
or impossible for gift card holders to establish ownership of
abandoned gift card balances.

Factors Supporting Claim that State Laws Offer Greater
Protection than the EFTA

In its notice, the CFPB acknowledges that the transferal of
unused gift card balances to a state presumably protects gift card
holders from the imposition of fees for inactivity or management,
provides gift card holders with infinite opportunity to file a
claim and obtain card balances (in cash form) from the state, and
also offers protection from the potential for loss should a gift
card issuer become insolvent. Many of these factors were addressed
by the United States Court of Appeals in N.J. Retail Merchants
Assn v. Sidamon-Eristoff, 669 F.3d 374 (3d Cir. 2012),
reh'g denied (3d Cir Feb. 24, 2012), which concluded that they
supported a conclusion that New Jersey's unclaimed property
statutes provide additional protections.2

Effect of CFPB's Determination

Should the CFPB determine that the two year abandonment
presumption in Maine and Tennessee is inconsistent with the EFTA,
such provisions will be pre-empted by federal law, resulting in the
imposition of a minimum five-year period in order for a gift card
to be presumed abandoned for purposes of state unclaimed property
provisions. Such a holding with respect to Tennessee and Maine
would also affect other states requiring custodial escheatment of
gift card balances after periods of inactivity of less than five
years. One suggested middle ground on which the CFPB seeks comment
is the extent to which gift card issuers might comply with both
state and federal law by honoring unclaimed gift cards, the
balances of which have been deemed abandoned and transferred to a
state, and then requesting reimbursement from Maine or
Tennessee.

The deadline to submit comments addressing this preemption
determination is October 22, 2012.

Absolute Assignment of Rents: Maybe Not in
Tennessee

by: Ryan K. Cochran

An absolute assignment of rents conceptually, if not by its very
name, provides a mortgagee on an income producing property with the
"absolute" right to rental income generated by the
mortgaged property in the event of a default by the borrower.
However, Tennessee's Bankruptcy Courts have given disparate
treatment to the absolute assignment of rents in mortgage loan
transactions. In order to create clear law and predictable
outcomes, lenders should call upon the Tennessee legislature to
craft a solution to the uncertainty caused by the conflicting court
decisions.

The economic incentives on which an assignment of rents is based
is nicely summarized as follows:

When a loan is secured by a mortgage or deed of trust on an
income-producing property, such as an office building, shopping
center, or apartment complex, rents are a significant part of the
security of the loan, in addition to the land and improvements.
Rents provide the funds necessary to pay for operating and
maintaining the mortgaged property, and to make payments on the
mortgage loan. After a default on the mortgage loan, a borrower,
facing the possibility of losing the property to foreclosure, may
apply rents to purposes unrelated to the property or the mortgage
loan. The lender, on the other hand, wants rents collected after a
default to be applied to operation and maintenance of the property
or to the mortgage debt. Therefore, a lender wants the ability to
control rents from the mortgaged property in the event of a
default, and to this end will require the borrower to execute an
assignment of rents at the loan closing.3

Given the status of the law today, a lender can no longer be
certain that an assignment of rents will provide it with the
ability to control rents from the mortgaged property after an event
of default. Bankruptcy cases highlight this uncertainty.

When a borrower files bankruptcy the principal issue the lender
faces is whether the post-petition rents generated by the
debtor's business constitute "cash collateral" within
the meaning of § 363 of the Bankruptcy Code. The lender
expects that as a result having obtained an assignment of rents,
the cash is not cash collateral because all rights to the rents
generated by the debtor's business were "absolutely"
assigned to the lender. The debtor, however, asserts that it
retained some rights in the rents even after the assignment and
thus the cash is simply cash collateral that the debtor can use in
its bankruptcy case so long as the lender's interest is
adequately protected. The determination of this issue depends on
whether the assignment of rents at issue effectively transferred
the rents absolutely to the lender or was merely a grant of a
security interest in the rents. A lender with a separate loan
document titled "Absolute Assignment of Rents" may
believe this is a non-issue and that it will be permitted to
control the rents. However, the Tennessee bankruptcy courts do not
agree.

In 2010, the United States Bankruptcy Court for the Western
District of Tennessee held that an assignment of rents
was an absolute assignment rather than the
grant of a security interest. The decision was affirmed by the
District Court.4

However, in 2011, on the other side of the State, the United
States Bankruptcy Court for the Eastern District of Tennessee found
that: "an assignment of rents absolute on its face will
nevertheless be viewed as a security interest."5
Exemplified by these decisions, Tennessee courts have for years
ruled inconsistently as to whether an assignment of rents is
absolute or for security.

A September 2012 hearing in the United States Bankruptcy Court
for the Middle District of Tennessee was the impetus for writing on
this topic. The Middle District found that an absolute assignment
of rents was a grant of security and found the rents constituted
property of the estate.6 As a result, the post-petition
rents generated by the debtor's business were determined to be
cash collateral, and the debtor was permitted to use the rents
after providing the lender adequate protection. After announcing
his decision from the bench, the bankruptcy judge noted the
existence of conflicting decisions interpreting absolute assignment
of rents. The judge also acknowledged the difficulty lawyers faced
in advising their clients on how an assignment of rents would be
interpreted by the Bankruptcy Court. The judge further suggested
that a legislative fix might be needed to give stakeholders more
clarity and certainty on what rights parties have when they enter
into an absolute assignment of rents.

As it exists today, the law interpreting absolute assignment of
rents is uncertain and inconsistent. This will result in further
litigation and expense for all parties. Eventually a trend
will develop from court decisions that answers this question, but a
judicial solution may result in a determination that an absolute
assignment of rents is merely a security interest. A legislative
fix will be more certain and can establish the parties' rights
under an assignment of rents. A legislative fix could also save the
parties and the court's expense and time by limiting future
litigation on this issue. If lenders want certainty that they will
be able to control a debtor's rents in a bankruptcy proceeding
by virtue of obtaining an absolute assignment of rents then it is
time to seek a legislative fix.

Highlights of the Eighth Annual Southeastern Banking
Seminar

On August 17th, nearly 90 banking executives and
industry leaders gathered for Waller's Eighth Annual
Southeastern Banking Seminar. The 2012 program was held at the
Waller Conference Center in downtown Nashville and featured an
impressive faculty who discussed recent developments and emerging
issues within the financial services industry.

The 2012 Southeastern Banking Seminar included the following
presentations:

Commissioner Greg Gonzales, Tennessee Department of Financial
Institutions, opened with a discussion of recent and ongoing
activities and efforts by the Department;

Brian Branson, Director of Sterne Agee & Leach, Inc.,
provided a summary of recent capital raising efforts and M&A
activity, as well as an outlook in these areas for the future;

John Buchanan, Senior Vice President and General Counsel of the
Federal Reserve Bank of Dallas, concluded with a discussion of
challenges facing the banking industry from both a regulatory and
insider perspective.

Footnotes

1 Under Maine's unclaimed property statutes, gift
card balances are presumed abandoned two years from December 31 of
the year when the obligation arises or from when the last
transaction involving the gift card occurred. Under Tennessee law,
gift cards balances are presumed abandoned at the earlier of (1)
the date of expiration of the card, or (2) two years from the date
the gift card was issued.

2 New Jersey presumed gift card balances to be abandoned
after a two year period. However, New Jersey's unclaimed
property statutes were subsequently amended to impose a presumption
of abandonment after five years—thus obviating the question
whether the EFTA preempted the statute.

3 Still Crazy After All These Years: The Absolute
Assignment of Rents In Mortgage Loan Transactions, 59 Fla. L. Rev.
487, 488-89 (July, 2007) (This article relies heavily on this law
review article and its in depth discussion of this issue. A reader
interested in a more in depth discussion of this issue will find
this article informative.)

The FTC has long asserted it has the authority to bring actions in federal court to obtain injunctive relief and equitable monetary remedies (e.g. disgorgement, consumer redress) for unfair and deceptive practices.

Throughout law school I worked with the Suspension Representation Project (SRP) as an advocate in New York City public school suspension hearings, and am now helping to coordinate a new project at Proskauer through our partnership with SRP and The Center for Popular Democracy.

This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).

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